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• Parity calls not in vogue as the Aussie puts on weight.
• Intervention for the JPY, US to buy treasuries.
• Structural change delivers reform to the market.

Throughout the 2nd half of 2009, amidst a strong equity market recovery and a boom in demand for the higher yielding Aussie, the ‘parity call’ against the Greenback had become monotonous. Today however we’ve seen the local unit find fresh highs since the collapse of Lehmann Brothers and the call for parity has rarely been heard, a strong sign of more cautious optimism from local analysts. This week has been one of the most active for currency markets, whether it is from data releases, currency market intervention or from the structural change to the financial markets. The AUD made the most of the conditions and the local unit put on weight courtesy of strong data and equity market rallies. The data from Australia was strong with Home Loans (1.7%), Employment Change (30.9K) and Unemployment (5.1%) all posting better than expected results which saw the Aussie gain during the local sessions. In the US, Retails Sales ex Autos (0.6%) were strong while Initial Jobless Claims (451K) were less than the previous month. In the region, Chinese Industrial Output (13.9%) and Retail Sales (18.4%) had a strong impact on Asian equity markets and commodity prices. As a result, the Aussie has posted fresh highs against the Greenback to levels not seen since the crash of Lehman Brothers, this time two years ago.

Of key significance for the Australian dollar this week is what occurred in the US and Japan. In the US, there is intense speculations that the Federal Reserve will engage in much more aggressive quantitative easing by purchasing as much as a trillion USD of government debt in order to reduce 10 year yields to levels not seen since the 1950’s. This has resulted in an increase in the price for treasuries as demand lowers the yield paid while highlighting the lack of confidence in the current growth prospects for the US economy and undermining the USD. Out of Japan, the government, which only this week overcame a leadership challenge, announced that it would intervene in currency markets, with the objective of weakening the yen which had been trading at a 15 year high against the USD. The strong yen was having a dire impact on their outward looking, export led economy while having a broader impact on Asian equity markets. It appears that the otherwise anti-interventionist government succumbed to political pressure and the end result has been a recovery in the AUDJPY cross.

To round out a busy week for the currency markets, there has been an announcement regarding the Basel accord, a Swiss based committee that had the objective of driving reform for a failed banking system. We reported earlier in the year that there had been a missed opportunity after the uninspired announcement surrounding the new capital requirements. The result had been substandard, particularly given the success of the Australian governments in the 80’s and 90’s to drive banking conservatism. The governments had forced greater capital requirements onto the ‘Big Four’ and this was credited with ensuring our economy was resilient during the GFC. This week, the committee announced that they would double the capital requirements for banks, which softened risk appetite overnight yet delivers a more robust financial market and more resilient global economy.

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